With the market in a 3rd consecutive day of decline, investors are putting money into the Vanguard Dividend Appreciation ETF (VIG) according to the WSJ’s “buying on weakness” list which tracks stocks that fell in price but had the largest inflow of money.
VIG’s top holdings include Wells Fargo & Co, IBM and Coca-Cola. The $1.9 billion fund carries an expense ratio of 0.24% and pays a dividend yield of 2.14%.
Take care before joining the herd of investors who are moving out of bonds and into dividend paying stocks in search of higher yields.
That’s according to the WSJ’s Jason Zweig who worries that investors are not considering the fact that stocks carry higher risk of loss than bonds.
His example — the Standard & Poor’s “dividend aristocrats” which includes the the companies in the S&P 500 index that have raised their dividends every year for at least 25 years in a row. Despite an average yield that was twice that of Treasury bills, the index fell 21.6% in 2008.
The aristocrats dividend index has been popular among ETF investors with the SPDR S&P Dividend ETF (SDY) taking in over $100 million of new money in 2009.
British investor Peter Temple writes about his thoughts on generating more income from his portfolio in the Financial Times column A risky search for yield.
Temple mainly invests via ETFs and is looking at higher yielding equities in both the UK and Europe. For U.S. investors, a search of ETF MarketPro’s directory of Dividend ETFs shows 19 funds that specialize in dividends.
Sorting the directory by yield (click on the word “Yield” in the first row) shows that Dow Jones EPAC Select Dividend Index Fund (IDV) has a distribution yield of 6.16%. The fund tracks an index of companies that have provided relatively high dividend yields on a consistent basis over time. 25% of the portfolio is currently concentrated in financials.
An alternative is the Claymore S&P Global Dividend Opportunities Index ETF (LVL) which has a trailing twelve month dividend yield of 7.74%. The fund tracks an index that consists of 100 common stocks and ADRs that offer high dividend yields. The index uses a yield-driven weighting scheme that weights the highest yielding stocks most heavily.
Conventional investing wisdom these days is to go with dividend paying stocks. The logic is that even if the market moves sideways, you’ll get paid to wait.
However, SmartMoney’s Roya Wolverson cautions that investors should tread carefully among the three dozen dividend ETFs due to their heavy concentration in the troubled financial sector.
In the article Beware the Dividend ETF, Wolverson notes that, although banks and insurance companies have historically paid some of the highest dividends, they have recently been cutting back.
Wolverson recommends looking for ETFs that re-evaluate the portfolio often and for funds that are not overly exposed to financials.
The First Trust Value Line Dividend Index Fund (FVD) re-evaluates monthly and has a 17% exposure to financials. The Vanguard Dividend Appreciation Fund (VIG) has only 8% of portfolio holdings in financials.
Money manager Marvin Appel lays out his case for dividend paying ETFs in a recent issue of Investment News.
In the article Reaping high dividend income with ETFs, Appel recommends using ETFs over mutual funds due to lower expenses. He also suggests combining a US focused dividend fund such as the SPDR S&P Dividend ETF (SDY) in combination with an emerging market dividend fund like the WisdomTree Emerging Market High Yielding Equity Fund (DEM).
According to Appel’s analysis, a portfolio of dividend ETFs made up of 80% US and 20% Emerging Markets would have performed better with less risk than portfolios focused 100% on either category.
According to company websites, DEM has a distribution yield of 6.1% and 30 day SEC yield of 10.4%. SDY has a dividend yield of 5.65%.
Smart Money’s Jack Hough screens for stocks paying consistently high dividends in the article 6 Stocks Paying Reliable 6% Yields.
The main stock that Hough profiles is the New York City utility Consolidated Edison (ED). Hough points out that the company has reliably maintained its dividend which now yields 6% due to a decline in share price.
Three ETFs hold at least 3% of the fund in Con Ed including the First Trust Alphadex Utility Fund (FXU), the PowerShares FTSE RAFI Utilities Sector Portfolio (PRFU) and the SPDR S&P Dividend ETF (SDY).
See the Dividend ETF Directory for a complete listing.
The WSJ’s Tom Lauricella is predicting that Anxious Investors May Turn to Funds Focused on Dividends.
The logic is straightforward. After a terrible year for equities, investors will be gun shy and will only be looking for stocks with solid balance sheets and reliable cash flow paid out as dividends.
Mutual funds that focus on dividend paying stocks are expensive, opaque and tax-inefficient. So dividend ETFs are the answer.
Lauricella suggests considering the iShares Dow Jones Select Dividend Index Fund (DVY). The $3.6 billion fund concentrates in financials (43%), utilities (19%) and consumer goods (12%).
See the Dividend ETF Directory at ETF MarketPro for a complete listing.
